One of the essential and recurring challenges of regulating unlawful conduct on the Internet—be it child pornography, harassment, fraud, data theft, content piracy, or otherwise—is identifying who is responsible.

Frequently, one can identify an IP address that is (or may be) a target of interest. IP addresses can be traced to responsible organizations, through publicly accessible registries. However, to complete the chain back to a person generally requires the cooperation of the organization.

Commercial ISPs are in the business of providing IP addresses (and network connectivity) to their customers. So, inevitably, they find themselves on the receiving … Continue Reading

One of the essential and recurring challenges of regulating unlawful conduct on the Internet—be it child pornography, harassment, fraud, data theft, content piracy, or otherwise—is identifying who is responsible.

Frequently, one can identify an IP address that is (or may be) a target of interest. IP addresses can be traced to responsible organizations, through publicly accessible registries. However, to complete the chain back to a person generally requires the cooperation of the organization.

Commercial ISPs are in the business of providing IP addresses (and network connectivity) to their customers. So, inevitably, they find themselves on the receiving end of many requests to identify their subscribers.

ISPs in Canada have contractual, regulatory, and legal duties of confidentiality that restrict the disclosure of their customer information. However, these duties are not absolute. Because this information can be necessary to uphold legal rights or to enforce obligations, courts can and do order ISPs to disclose this information. In civil matters, this usually involves a Norwich order.

The case of Rogers v. Voltage deals with the issue of who is liable for the cost to comply with such an order. In particular, the case asks whether historical common law rules providing for reimbursement of third party costs have been displaced by the statutory “Notice and Notice” regime under the Copyright Act.

Voltage Pictures LLC is the production and distribution company behind, among other films, The Hurt Locker, Dallas Buyers Club and, more recently, Colossal. It has been an active file-sharing litigant in Canada. Most recently, it has launched a novel (and somewhat controversial) reverse class-action suit claiming relief for mass infringement of their copyrights. In connection with this suit, Voltage requested an order forcing Rogers Communications to identify a single subscriber, who Voltage names as the proposed class defendant in the suit.

Voltage requested this order “in accordance with” sections 41.25 and 41.26 of the Copyright Act (the Notice and Notice regime). Section 41.26(b) requires ISPs who receive statutory notices from copyright holders about alleged infringements to retain records sufficient to permit the identification of the subscribers, in the event of court proceedings. However, nothing in these sections expressly addresses the disclosure of that information to the copyright owner, in connection with those proceedings.

Rogers took no position on whether Voltage was entitled to the order, but asked for compensation for its costs incurred to carry out the order, if it was granted. The Federal Court agreed. Voltage appealed, and the Federal Court of Appeal modified the order, removing the obligation to provide any payment to Rogers.

According to the Court of Appeal, because s. 41.26(2) of the Copyright Act states that no fee can be charged for retaining the information in the absence of a regulation (and no such regulation has been enacted), the only potentially compensable cost for Rogers was the incremental cost to transmit the information to Voltage. The court concluded this was negligible.

Rogers sought, and has now received, leave to appeal this decision to the Supreme Court of Canada. The hearing has not yet been scheduled.

This decision will be of great interest to ISPs and to copyright holders seeking to enforce their rights against Canadian Internet users. It will also attract attention from consumer advocates concerned about the risk of “copyright trolling”, in which plaintiffs advance questionable (or entirely fictitious) legal claims in the hope of extracting settlement payments. However, because the case is likely to turn on the interpretation of the Notice and Notice clauses of the Copyright Act, it will probably not have a significant impact on the many other circumstances in which interested parties want to identify ISP subscribers.

Ciba Specialty Chemicals Water Treatments Limited v. SNF Inc., 2017 FCA 225, is the Federal Court of Appeal’s latest word on obviousness in patent law. The decision appears to unsettle established approaches to assessing obviousness. For what may be the first time since the Supreme Court’s endorsement of the “inventive concept” approach to evaluating obviousness in 2008, the Federal Court of Appeal by-passed the inventive concept inquiry entirely. The court also held that all dependent claims in the patent were invalid because the independent claim was obvious without … Continue Reading

Ciba Specialty Chemicals Water Treatments Limited v. SNF Inc., 2017 FCA 225, is the Federal Court of Appeal’s latest word on obviousness in patent law. The decision appears to unsettle established approaches to assessing obviousness. For what may be the first time since the Supreme Court’s endorsement of the “inventive concept” approach to evaluating obviousness in 2008, the Federal Court of Appeal by-passed the inventive concept inquiry entirely. The court also held that all dependent claims in the patent were invalid because the independent claim was obvious without reconciling previous Federal Court of Appeal jurisprudence holding that this was legally wrong. Finally, the court split 2-1 on the issue of whether the prior art in an obviousness attack must satisfy the “reasonably diligent search” test, with one judge declining to comment.

At trial, the Federal Court held that the patent at issue was obvious. The appellant alleged a series of errors on the part of the trial judge, including errors in the court’s preference between expert witnesses, and its determination of the common general knowledge. The appeal court dismissed these arguments, holding that the high standard of review – palpable and overriding error – had not been met.[1]

Next, the Federal Court of Appeal held that the trial judge had both misstated and misapplied the obviousness framework adopted by the Supreme Court of Canada in Apotex Inc. v. Sanofi-Synthelabo Canada Inc., 2008 SCC 61.[2] Rather than remit, the Federal Court of Appeal conducted the obviousness analysis afresh.

Three aspects of the court’s decision raise interesting issues for future cases.

First, the court chose not to determine the inventive concept of the claim. The court held that it was more efficient to simply construe the claims and invited Supreme Court guidance on the definition of “inventive concept”:

There may be cases in which the inventive concept can be grasped without difficulty but it appears to me that because “inventive concept” remains undefined, the search for it has brought considerable confusion into the law of obviousness. That uncertainty can be reduced by simply avoiding the inventive concept altogether and pursuing the alternate course of construing the claim. Until such time as the Supreme Court is able to develop a workable definition of the inventive concept, that appears to me to be a more useful use of the parties’ and the Federal Court’s time than arguing about a distraction or engaging in an unnecessary satellite debate.[3]

Applying the obviousness framework to its construction of Claim 1, the court held that Claim 1 was obvious.

Second, the court held that since Claim 1 was obvious, every other claim was therefore also obvious:

The result is that Claim 1 is obvious and, since all other claims are directly or indirectly dependent on Claim 1, the ‘581 Patent is invalid.

This holding is difficult to reconcile with prior Federal Court of Appeal jurisprudence not cited by the court. In Zero Spill Systems (Int’l) Inc. v. Heide, the Federal Court of Appeal reversed the Federal Court on this very holding:

The Federal Court was obliged to consider the validity of the ’064 Patent claim-by-claim. Not doing so was a legal error. Notwithstanding that Claim 13 is actually an independent claim, the nature of dependent cascading claims is to narrow the claims upon which they depend: Purdue Pharma v. Pharmascience Inc., 2009 FC 726, 77 C.P.R. (4th) 262 at paragraph 10. The practical effect of this on anticipation or obviousness is that eventually a claim may be sufficiently narrow to escape these prior art-based attacks, even though the broader claims may be invalid.[4]

Third, Justice Woods wrote a two-paragraph concurrence, declining to endorse the “reasonably diligent search” test cited by the majority. According to that test, only prior art that would be found by the skilled person conducting a reasonably diligent search may be cited in an obviousness attack. Some have argued that section 28.3 of the Patent Act, which places temporal restrictions on the prior art citable in an obviousness attack, overruled the reasonably diligent search test. In Justice Woods’ view, endorsing the test was unnecessary and it would have been preferable to reserve comment until it was squarely raised by the parties.[5]

[1] At paras. 27-33 (preference as between expert witnesses), 34-42 (content of the common general knowledge).

Project Jasper is an experiment being done by the Bank of Canada, Payments Canada and R3 to test the viability and feasibility of using Distributed Ledger Technology (“DLT”) as the basis for wholesale interbank payment settlements. This project was launched in March 2016 and has completed two phases. Phase 1 of Project Jasper employed the Ethereum platform as the basis for the DLT, while Phase 2 employed the custom-designed R3 Corda platform. In June 2017, the Bank of Canada issued a report on its preliminary findings from Project Jasper, which were summarized in our previous … Continue Reading

Project Jasper is an experiment being done by the Bank of Canada, Payments Canada and R3 to test the viability and feasibility of using Distributed Ledger Technology (“DLT”) as the basis for wholesale interbank payment settlements. This project was launched in March 2016 and has completed two phases. Phase 1 of Project Jasper employed the Ethereum platform as the basis for the DLT, while Phase 2 employed the custom-designed R3 Corda platform. In June 2017, the Bank of Canada issued a report on its preliminary findings from Project Jasper, which were summarized in our previous article. On September 29, 2017, the Bank of Canada, Payments Canada, and R3 released a white paper outlining their detailed findings from Project Jasper. This article elaborates on our previous article based on the findings from the white paper and discusses the next steps for Project Jasper.

Key Merits and Considerations of Project Jasper

End-to-End Settlement

Project Jasper was premised on the idea that payment settlement is the final leg of most economic transactions, but also that other areas of the contract chain have the potential to be supported by DLT. For example, “smart contracts” can be used to codify the terms and conditions of an agreement and can be automatically executed once certain conditions are met. Based on the experience from Project Jasper, the primary benefit of a DLT interbank cash payment platform would be an “end-to-end” settlement, meaning that the DLT arrangements for payment settlement would be aligned with other DLT arrangements within the same economic contract.

Settlement Risk

Principle 8 of the Principles for Financial Market Infrastructures (“PFMIs”) requires that a settlement must be final and irrevocable. Settlement finality in Phase 1 was “probabilistic” because of the possibility that a payment could fail to remain in the blockchain and be recorded under a proof-of-work consensus. To address this and improve settlement finality, Phase 2 introduced a notary node to be managed by a trusted third party. The Bank of Canada served as the notary node and was responsible for confirming the uniqueness of a transaction to avoid double spending. The second requirement under PFMIs is that there be a full and irreversible transfer of an underlying claim in central bank money. To meet this, Project Jasper created a digital depository receipt (“DDR”) as a digital settlement asset, which represented a claim to central bank deposits. The strength of the legal basis for settlement finality remains to be tested.

Operational Resilience and Efficiency

Project Jasper used a “permissioned” DLT, meaning that only those approved could use the exchange. This allows regulation of users and allows consensus to be achieved more quickly than with a public ledger. DLT solutions can also reduce the number of errors and duplications compared to the incumbent, manual systems in Canada because parties are required to reach a consensus before a transaction is posted. However, due to the limited implementation of the project, it is difficult to assess whether DLT is more operationally efficient than the current system.

The white paper also considered the operational resiliency of Project Jasper and noted the following:

Capacity

Phase 1: The maximum processing capacity was 14 transactions per second, which is similar to incumbent systems, meaning there are constraints for future volume increases.

Phase 2: There is capacity for volume increases, in part because only the transacting parties, a supervisory node and the notary node are required to validate and record transactions (vs. the requirement for majority consensus in Phase 1).

Availability and Cost

Phase 1: The proof-of-work consensus allows for high availability at a lower cost. This is because of the sharing of databases across all participants in the proof-of-work consensus and the back up of ledgers by all participants.

Phase 2: To increase data privacy, each participant had a proprietary ledger. This creates challenges for data replication across the network.

Risk

Phase 1: The consensus protocol requires agreement of a majority of R3 members, meaning there could not be a single point of failure.

However, this does not eliminate the need for participants to back up their data. Due to the confidentiality of the information, in the event of a failure, participants would be unlikely to share data.

Phase 2: Both the notary and supervisory nodes are needed for consensus, therefore increasing the risk of a single point of failure. To mitigate this risk, participants will need to back up their data.

Potential Applications & Benefits of DLT to the Payments Industry

Reduction of Disputes and Errors

A single payment or file transfer can involve many participants, and therefore may be recorded by multiple financial institutions. This can lead to errors and duplication, and inevitably, disputes. DLT technology requires multiple parties to reach an agreement on the legitimacy of a transaction before it can be posted. While this is a recognized benefit of DLT, the overall operational efficiency of this benefit compared to the incumbent system has not been measured.

Improved Back-Office Efficiency

After the parties reach a consensus, a single record of the transaction is recorded. This eliminates the need for internal record keeping of each party. Project Jasper found that DLT is not necessarily more efficient on a domestic level than the current LVTS system, however the analysis did not account for the back-office work that might be avoided by the individual financial institutions if DLT is used. Significant resources are expended in back-office reconciliations; therefore there may be significant cost savings that have not yet been considered.

Regulatory Compliance

DLT has the potential to assist with regulatory compliance, particularly with anti-money laundering (“AML”) and anti-terrorism financing (“ATF”) regulations for cross-border transactions where counterparty risk can run high. In the current system, false positives in relation to AML/ATF are a problem as they can take weeks or months to resolve. DLT has the potential to allow for easier reconciliation of such payments in order to legitimize a transaction because of the trusted ledger created. These benefits could extend to other regulatory compliance as well.

Transparency vs. Privacy

In the traditional clearing and settlement process, there is a central database. The DLT used in Phase 2 allows for privacy between the financial institutions, with each only being able to view their own proprietary ledgers. However, those with the supervisory or notary nodes can view all transactions and therefore have the ability to monitor and perform the traditional function of a central database. In Phase 2, the Bank of Canada held the supervisory and notary nodes.

Improved Automation through use of Smart Contracts

As previously discussed, significant benefits can be obtained where DLT can be used for end-to-end settlement through the use of smart contracts. The solution system created by Project Jasper could be the basis upon which other DLT platforms can be built for a variety of transactions, such as the settlement of financial asset transactions, managing syndicated loans, and supporting trade finance.

Conclusions from Phase 1 and Phase 2

The key conclusions from Phase 1 and 2 of Project Jasper are that DLT platforms that employ a “proof-of-work” consensus protocol, as used in Phase 1, do not deliver the required settlement finality and low operational risk. While Phase 2 was able to address improvements in settlement finality, scalability and privacy, it did not adequately address operational risks requirements. Further evaluation and enhancements will need to be done to satisfy PFMIs. On a global scale, the white paper recommends that the focus should be on developing protocols for interoperability between DLT platforms.

Overall, Project Jasper is an example of the benefits of collaboration within the payments industry. Such collaboration is particularly conducive in the concentrated Canadian financial industry. This collaboration is being extended for Phase 3.

Phase 3

On October 17, 2017 Payments Canada, the Bank of Canada and TMX announced the third phase of Project Jasper. This phase will build on the first two phases and involve developing a proof of concept for the clearing and settling of securities. Phase 3 hopes to explore an end-to-end settlement process by integrating the securities and payment infrastructure and the ability to settle multiple assets on the same ledger. The objectives of this phase are to reduce the cost of securities transactions, increase efficiency, and reduce settlement risk. The results of this phase are expected to be released at the Payments Canada Summit in May 2018.

In a decision expected to be widely noted by the startup community, the Ontario Securities Commission (“OSC”) approved the first initial token offering (“ITO”, also known as an initial coin offering or “ICO”) in Ontario. The decision released October 17, 2017 comes in the wake of increasing innovation and market activity within the fintech and cryptocurrency space in Canada.

Background

The applicant, Token Funder Inc. (the “Applicant”), is a blockchain business incorporated in Ontario seeking to offer a technology platform for businesses to raise capital … Continue Reading

In a decision expected to be widely noted by the startup community, the Ontario Securities Commission (“OSC”) approved the first initial token offering (“ITO”, also known as an initial coin offering or “ICO”) in Ontario. The decision released October 17, 2017 comes in the wake of increasing innovation and market activity within the fintech and cryptocurrency space in Canada.

Background

The applicant, Token Funder Inc. (the “Applicant”), is a blockchain business incorporated in Ontario seeking to offer a technology platform for businesses to raise capital through tokens, coins and other blockchain-based securities. In particular, the decision notes that the Applicant specifically intends for the platform to enable crowdfunding and private placements of blockchain-based securities.

Exemptions Granted

To fund the completion of the platform, the Applicant applied for exemptive relief from dealer registration requirements pursuant to National Policy 11-203 — Process for Exemptive Relief Applications in Multiple Jurisdictions. Under Section 74 of the Ontario Securities Act (the “Act”), the OSC gave approval for the Applicant to conduct the ITO as a private placement under the offering memorandum prospectus exemption (a summary of which can be viewed here) for a 12-month period. In Ontario, the Applicant received exemptive relief from registration required by securities dealers under Section 25 of the Act. In other Canadian provinces and territories, the Applicant received exemptive relief under the passport system with the OSC designated as the principal regulator.

The exemptions were granted in the context of the Canadian Securities Administrators’ regulatory sandbox, launched in February 2017 (the “CSA Sandbox”), to support fintech businesses seeking to offer innovative products, services and applications. The CSA Sandbox allows firms to obtain exemptive relief from certain securities law requirements that may impede their innovative business models, provided that investor protection is not compromised.

Token Funder Inc. is only the second such fintech in Canada to receive approval for an ITO in the context of the CSA Sandbox. The first was Impak Finance Inc., which received an exemption from the dealer registration and prospectus requirements in August 2017. The Autorité des marchés financiers was the principal regulator in that case.

The Initial Token Offering

The Applicant’s ITO will involve the initial distribution of up to 200,000,000 of a total of 1,000,000,000 “FNDR Tokens” (the “Tokens”) with an approximate gross value of CAD $10,000,000. The Tokens, a digital asset created through a smart contract on the Ethereum blockchain, will be offered through the website of the Applicant. Potential investors are limited to a maximum investment equivalent to CAD $2,500 unless shown to be an “eligible investor” or “accredited investor” as defined in National Instrument 45-106 — Prospectus Exemptions.

Notably, this means that the ITO will be the first ITO approved by a securities regulator in Canada which is open to retail investors. Previous ITOs have usually relied on exemptions permitting tokens to be sold only to accredited investors, thereby limiting the opportunity for retail investors to participate in an offering.

The value of Ether, in cases where an investor chooses to subscribe for Tokens using such cryptocurrency, will be determined at the time that the subscriber completes the onboarding process and is approved for participation in the ITO. The Applicant must take reasonable measures to determine the value of Ether to ensure the $2,500 investment limit is not exceeded.

Applicant’s Obligations

Importantly, the OSC’s approval outlined the following conditions to be satisfied by the Applicant, among others:

The Applicant must conduct a know-your-client and suitability review and undertake to collect information from investors concerning investment needs and objectives, financial circumstances and risk tolerance. In particular, the Applicant must also conduct a survey to ensure that investors have a detailed understanding of cryptocurrency and digital token offerings.

The Tokens must not be listed and traded on any exchange (including cryptocurrency exchanges) or any organized market without the OSC’s advance approval.

In addition to fulfilling the reporting required under Ontario securities laws, the Applicant must provide to the OSC details of investor complaints within 10 days of receiving such complaints and make quarterly reports detailing average subscription amounts, total subscription amounts by region and any other information the OSC may reasonably request.

Proceeds from the offering must be returned to subscribers if a minimum of CAD $500,000 is not raised. The smart contract established for purposes of the offering will automatically return funds to subscribers if the minimum capital raise does not occur.

While the OSC indicated that innovation and the fostering of capital raising were considerations that lead to the approval of this ITO, it cautions that the decision is based on the particular facts and circumstances of the Applicant and should not necessarily be seen as a precedent for other ITOs. Organizations considering an ITO or similar offerings are therefore well-advised to seek legal advice concerning their proposed activities.

UPDATE: The Act has now been passed and has received Royal Assent. It will come into force at a later date, yet to be determined.

The Cyber-protection Act, like the CSA, is notable for making Nova Scotia the first Canadian province to formalize and adopt cyber-bullying legislation. Similar to its predecessor, the Act proposes to create civil remedies to deter, prevent, and respond to the harms of non-consensual sharing of intimate images and cyber-bullying.Under the proposed Act, a complainant whose intimate image was distributed without consent or who was victim to cyber-bullying may apply to court for a wide range of remedial orders. The complainant must identify, depending on the circumstances, either the alleged perpetrator or the person(s) who have control over the IP address, email address, or any other unique identifier used to distribute the intimate images or cyber-bully.

A complainant must prove that cyber-bullying occurred or that an intimate image was distributed without consent. “Cyber-bullying” is defined broadly in the Act as an electronic communication that causes or is likely to cause harm, but requires an element of malice or recklessness that provides for a narrower definition when compared to the previous CSA definition. The overbreadth of what had constituted cyber-bullying in the CSA—in brief, any electronic communication intended or ought reasonably be expected to cause harm, without the explicit element of malice—was one of the chief reasons of the Nova Scotia Supreme Court’s decision to strike down the legislation.

Similarly, to make a distribution of an intimate image without consent requires knowledge that the depicted person did not consent, or being reckless as to whether consent was given. This is an extension of the scope of the Act, compared to the CSA, but it mirrors language that was added to s. 162.1 of the Criminal Codein 2014.

In making an order, the Act empowers the court to consider a wide range of possible remedies, notably:

prohibiting a person from distributing the intimate images or making communications that would be cyber-bullying;

While the CSA did not provide for any affirmative defences, it is a defence under the Act for the respondent to show that the distribution of an intimate image was made with either implicit or explicit consent. Moreover, it is also a defence to show that the publication of a communication was, with respect to jurisprudence on defamation, (i) fair comment on a matter of public interest, (ii) done in a manner consistent with principles of responsible journalism, or (iii) privileged. Finally, where an intimate image was distributed without consent or a communication was made, it is a defence for the respondent to show that the distribution or communication is in the public interest and did not extend beyond what is in the public interest.

Nonetheless, the Act does not go as far as it might have in creating new defences or carving out protected forms of expression. Notably, although the Act draws on defamation doctrines, truth is not a defence under the Act.

The analysis of the CSA in Crouch v. Snell specifically noted that truth-finding and individual self-fulfillment are core Charter values; the assertion that the CSA could restrict this kind of expression was central to the conclusion that its limits on freedom of expression could not be saved under section 1 of the Charter. It is open to question whether the new Act may fail in the same way, for the same reason. However, from an instrumental perspective, the decision not to include a truth defence makes some logical sense: true statements, wielded with intent to harm, may be just as damaging as false ones. Ultimately the Act aims itself at the intent to harm rather than at falsehood.

However, this emphasis may actually contribute to the practical burden on the plaintiff. Where the CSA provided for an ex parte proceeding, which could be based on an objective assessment of the reasonably expected consequences of a communication, the Act contemplates contested proceedings which will have to consider the subjective intention behind a communication, the manner and circumstances in which it is carried out, and its actual (or likely) effects. These proceedings risk exposing plaintiffs to the very reputational harms the Act is intended to avoid. It may be open to question whether complainants will consider this a worthwhile exercise to engage with.

Finally, it is worth noting that CyberSCAN, the provincial agency previously empowered under the CSA to investigate and commence legal action against alleged respondents, has a diminished role under the Act. Although still empowered to provide voluntary dispute-resolution services, CyberSCAN retains only a public awareness, education, and advisory role under the Cyber-protectionAct. While the administrative enforcement model of the CSA was subject to some criticism, questions have been raised (including in the Second Reading and Third Reading debates in the Nova Scotia House of Assembly) whether this change will deprive complainants of important support and assistance in the legal process.

On October 26th, the Act passed Third Reading and subsequently received Royal Assent to come into force at a later date. The final language of the Act, when compared to its initial introduction, increases CyberSCAN’s informational mandate and reduces the Minister’s review from within five years to three years of the Act coming into force. Given Nova Scotia’s leading role in advancing cyber-bullying legislation, its developments in this space should be closely watched, both to see whether the new balance sought by the Act attracts public support within the province (and, ultimately, judicial endorsement) and as a model that might be emulated by other provinces.

The Transatlantic Policy Working Group (“TPWG”), an organization set up by Innovate Finance and some of its partners and which is dedicated to Fintech policy discussion between the United States and United Kingdom, recently published a report entitled The Future of RegTech for Regulators (the “TPWG Report”). RegTech refers to the use of technology to facilitate compliance with regulatory requirements via improved data analytics, reporting, and information governance (please see our previous blog posts on RegTech here and here). These technologies have the potential to help business increase … Continue Reading

The Transatlantic Policy Working Group (“TPWG”), an organization set up by Innovate Finance and some of its partners and which is dedicated to Fintech policy discussion between the United States and United Kingdom, recently published a report entitled The Future of RegTech for Regulators (the “TPWG Report”). RegTech refers to the use of technology to facilitate compliance with regulatory requirements via improved data analytics, reporting, and information governance (please see our previous blog posts on RegTech here and here). These technologies have the potential to help business increase accuracy of their reporting and compliance programs while concurrently reducing costs.

The TPWG Report highlights possible ways in which regulators may approach Fintech solutions for regulatory compliance in the future. Understanding the models behind the approaches adopted by regulators will be key to ensuring that Fintech entities understand the letter and spirit of future regulations.

The key conclusion of the TPWG Report is that regulators should keep an open mind to the different approaches being taken by their counterparts in other countries. There are different models which regulators can follow, which include the “Ecosystem Approach”, the “Digital Financial Infrastructure Approach” and the “Rule and Process Change Approach”. Critical consideration of these underlying models can be important in ensuring that regulation is consistent and strikes the appropriate balance between encouraging innovation and protecting the financial system from risk.

Ecosystem Approach

In an Ecosystem approach to Fintech regulation, regulators seek to create a comprehensive environment of cooperation between industry and policymakers. This can be done by building relationships with Fintech startups, academics, and incumbent players in the space and providing them with forums for communicating their ideas and concerns. The end goal is to facilitate a constructive dialogue between market players and regulators which drives innovation.

Several countries have adopted the Ecosystem approach to Fintech regulation. For example, the Monetary Authority of Singapore has created a Fintech & Innovation Group which seeks to work with industry in the areas of payments, technology infrastructure, and testing of next solutions. Likewise the United Kingdom’s Bank of England has established a Fintech Accelerator to encourage proofs of concept in priority areas like fraud prevention, enforcement action transparency, and trading exchange analytics. In Canada, both the Ontario Securities Commission and the Autorité des marchés financiers have established fintech advisory committees composed of industry experts.

Digital Financial Infrastructure Approach

The Digital Financial Infrastructure approach focuses on modernization of regulatory infrastructure and processes in the medium term. This model recognizes that highly complex reporting obligations inherently favour large incumbents with significant compliance teams. By streamlining and harmonizing processes across regulatory agencies, governments can spur innovation while enhancing data driven compliance.

The Digital Financial Infrastructure approach has been enthusiastically adopted by the Government of Austria. The Austrian Central Bank has collaborated with the country’s commercial banks to create a common platform for reporting. The idea behind this new platform is regulators should be proactive rather than reactive in their monitoring of financial markets. The Austrian model is different from template based reporting which requires institutions to aggregate their information and fill out forms after the fact. Instead, the new platform encourages institutions to share data such as loans, contracts, or deposits in real time. Analytics can then aggregate and enrich this data to assess how the position of the Austrian financial sector is changing on a daily basis.

Applying the Digital Financial Infrastructure approach has significant potential in countries which have a myriad of regulators interested in the financial sector. For example, the United States financial system is overseen in part by the Office of the Comptroller of the Currency, Federal Reserve, Federal Deposit Insurance Corporation, National Credit Union Administration, Consumer Financial Protection Bureau, Securities and Exchange Commission, Commodity Futures Trading Commission, Financial Industry Regulatory Authority, Federal Trade Commission and various additional state regulators. Similarly in Canada, the financial system is overseen by a multitude of federal and provincial regulators, including the Office of the Superintendent of Financial Institutions (OSFI), the Bank of Canada, the Financial Transactions and Reports Analysis Centre (FINTRAC), the Financial Consumer Agency of Canada (FCAC), provincial securities commissions and provincial financial services regulators, and various industry regulatory bodies. Simply updating existing platforms to have common nomenclatures for reporting could significantly enhance market efficiency and result in fewer resources being needed for corporate compliance.

Rule and Process Change Approach

In the longer term, regulators may want to change their rules and processes to implement policies for an increasingly digitized financial sector. Important areas which may require regulatory change include open application programming interfaces (“APIs”), digital identity, data protection, and machine learning. The Rule and Process Change Approach is a way of systematically adjusting regulations to accommodate emerging technology which maintaining regulatory consistency.

Updating rules and requirements to address the Fintech revolution is most effective if regulators collaborate with industry and adopt a principles based approach. The end goal of a principles-based approach is to avoid creating rules which become obsolete because they are not flexible enough to adjust to technological progress. For example, by publishing consultation papers on potential rules changes, regulators can get a sense of industry concerns before creating permanent requirements. The Canadian approach is consistent with this approach. Canadian financial services regulators have long favoured principles-based regulation and legislators and regulators issue consultation papers to obtain industry feedback. For example, the federal government has recently released consultation papers regarding Canada’s payments framework and the federal financial framework.

Regulatory and Industry Sandboxes

Sandboxes are a method of integrating the Ecosystem, Digital Financial Infrastructure and Rules Changes approaches. Regulatory sandboxes are groups within financial regulators which help Fintech entities “conduct controlled market tests under less stringent regulatory requirements”. The idea is that this will let innovators quickly create proofs of concept which can guide regulators in adjusting the financial sector infrastructure and rules as required. Regulatory sandboxes have been launched in the UK, Singapore, Australia, and Canadian securities commissions, among others.

The concept of regulatory sandboxes can be expanded to the broader financial sector. In an industry sandbox, different industry players come together to test solutions and “fail fast” in order to assess their proofs of concept. Industry Sandboxes are a key element of the Ecosystem approach to Fintech regulation. In Ontario, the Ontario Centres of Excellence recently announced a partnership with Boston-based FinTech Sandbox to help create such an industry sandbox in Canada, starting with Ontario, in order to further develop Ontario as a global start-up hub. Tracking developments in industry and regulatory sandboxes can assist regulators seeking to stay ahead of the curve in financial sector regulation.

On September 6, 2017, the British Columbia Securities Commission (“BCSC”) announced the first registration of an investment fund manager in Canada dedicated solely to cryptocurrency investments. First Block Capital Inc. (“First Block Capital”), which will operate a bitcoin investment fund, was registered as an investment fund manager and exempt market dealer. The company is also registered in Ontario, with the BCSC being its principal regulator.

In its news release announcing the registration, the BCSC noted that cryptocurrency investments raise unique risks, such as cybersecurity risks that accompany dealing in digital currencies, that distinguish … Continue Reading

On September 6, 2017, the British Columbia Securities Commission (“BCSC”) announced the first registration of an investment fund manager in Canada dedicated solely to cryptocurrency investments. First Block Capital Inc. (“First Block Capital”), which will operate a bitcoin investment fund, was registered as an investment fund manager and exempt market dealer. The company is also registered in Ontario, with the BCSC being its principal regulator.

In its news release announcing the registration, the BCSC noted that cryptocurrency investments raise unique risks, such as cybersecurity risks that accompany dealing in digital currencies, that distinguish such investments from investments in traditional asset classes. These risks relate not only to the registrant, but also to the cryptocurrency fund’s custodian, which is a third party chosen to facilitate the safekeeping and exchange of the cryptocurrency.

The BCSC imposed various conditions of registration on First Block Capital in order to provide the company with the flexibility to allow them to operate within the present regulatory framework and, at the same time, to provide the BCSC with the necessary tools to evaluate the unique risks that accompany cryptocurrency investments.

The BCSC’s announcement follows less than two weeks after staff of the Canadian Security Administrators issued CSA Staff Notice 46-307 Cryptocurrency Offerings (“CSANotice”), which was outlined in an earlier blog post. In the CSA Notice, staff provided guidance on, among other subjects, several factors relevant to the operation of cryptocurrency investment funds and dealer registration requirements.

As noted in the BCSC’s news release, there is a strong appetite for access to cryptocurrency investments in Canada. We can expect that additional investment funds dedicated to cryptocurrency investments will appear in the near future. The BCSC advises that whether they are potential new registrants or existing fund managers, companies in B.C. that are considering including cryptocurrency investments in their funds should contact the BCSC’s Tech Team, created in January 2017 as part of the BCSC’s Fintech outreach initiative aimed at assisting B.C.-based Fintech and technology companies understand their securities regulatory requirements.

Finally, given the pace of development in the area of cryptocurrencies and blockchain technologies more generally, we can expect that securities regulators will continue to focus energy and attention on developing and refining regulatory instruments aimed at addressing potential risks associated with investments incorporating these innovations. This is an area that is the subject of rapid change and, as such, should be monitored closely.

On September 12, 2017 the UK Financial Conduct Authority (“FCA”) released brief guidance (“FCA Guidance”) on initial coin offerings (“ICOs”). This follows earlier guidance from the Canadian Securities Administrators (the “CSA”) in August on ICOs, a summary of which can be read here:

The FCA Guidance defines an ICO as a digital method of raising funds from the public using a virtual currency (cryptocurrency). An ICO can also be known as a “token sale” or a “coin sale”.

On September 12, 2017 the UK Financial Conduct Authority (“FCA”) released brief guidance (“FCA Guidance”) on initial coin offerings (“ICOs”). This follows earlier guidance from the Canadian Securities Administrators (the “CSA”) in August on ICOs, a summary of which can be read here:

The FCA Guidance defines an ICO as a digital method of raising funds from the public using a virtual currency (cryptocurrency). An ICO can also be known as a “token sale” or a “coin sale”.

ICO Risk Factors

The FCA Guidance notes that ICOs are high-risk, speculative investments with the following risk factors:

Unregulated space: most ICOs are not regulated by the FCA and many are based overseas.

No investor protection: investors are extremely unlikely to have access to UK regulatory protections like the Financial Services Compensation Scheme or the Financial Ombudsman Service.

Price volatility: like cryptocurrencies in general, the value of a token may be extremely volatile and vulnerable to dramatic price fluctuations.

Potential for fraud: some issuers might not have the intention to use the funds raised in the manner set out when the project was marketed.

Inadequate documentation: instead of a regulated prospectus, ICOs usually only provide a “white paper”. An ICO white paper might be unbalanced, incomplete or misleading. A sophisticated technical understanding is needed to fully understand the tokens’ characteristics and risks.

Early stage projects: ICO projects are typically in very early stages of development and their business models are experimental. There is a good chance an investor could lose their entire stake.

The FCA states that whether or not an ICO falls within the FCA’s regulatory purview is something that can only be decided on a case by case basis. While many ICOs will fall outside the regulated space, depending on their structure, some ICOs may involve regulated investments and firms which may be conducting regulated activities.

Businesses involved in an ICO are advised to consider if their activities could mean they are arranging, dealing or advising on regulated financial investments. Both promoters and exchanges are advised to consider if they need to be authorised by the FCA to deliver their services.

The FCA Guidance notes that some ICOs may share similarities with initial public offerings, private placements of securities, crowdfunding or collective investment schemes and may therefore fall within the prospectus regime.

In AstraZeneca v Apotex, 2017 FC 726, the Federal Court issued its damages decision concerning Apotex’s infringement of a patent pertaining to AstraZeneca’s LOSEC (omeprazole) drug. This decision offers insight in the factual hurdles a generic must overcome to establish an ex post facto non-infringing alternative (NIA), and confirms that s. 8 damages are not available during a period in which a generic would be infringing a patent, as there is no compensable loss.

After succeeding in the liability phase of the action (2015 FC 322; aff’d in part … Continue Reading

In AstraZeneca v Apotex, 2017 FC 726, the Federal Court issued its damages decision concerning Apotex’s infringement of a patent pertaining to AstraZeneca’s LOSEC (omeprazole) drug. This decision offers insight in the factual hurdles a generic must overcome to establish an ex post facto non-infringing alternative (NIA), and confirms that s. 8 damages are not available during a period in which a generic would be infringing a patent, as there is no compensable loss.

After succeeding in the liability phase of the action (2015 FC 322; aff’d in part 2017 FCA 9), AstraZeneca elected an accounting of the profits earned by Apotex during the period of infringement (September 5, 2003 to December 3, 2008). The parties resolved most of the quantification issues, leaving the Court with the following matters for determination.

Apotex did not have an available NIA

Apotex failed to meet its burden to establish that an NIA existed during the period of infringement. At trial, Apotex proposed NIAs that were unknown and never made before or during the infringing period. Justice Barnes agreed with Apotex that the infringer’s failure to produce a viable NIA in the real world is not a threshold bar to the availability of a NIA defence. Given the hypothetical nature of Apotex’s alleged NIAs, Justice Barnes considered the following question:

“Could the infringer have made the product had it attempted to do so at the relevant time and would the infringer have sold the product on some reasonable financial basis in substitution for the infringing product?”

Apotex suffered serious problems of proof in attempting to establish its ex post facto NIAs, in part based on facts of what occurred in the “real world”. In this case, Apotex’s “self-created NIAs” were made in non-commercial batches for the purpose of the litigation, and without full stability, bioequivalence, or clinical study data. Based on Apotex’s incomplete data, the Court found that Apotex failed to establish that its proposed NIA formulations could have obtained the required regulatory approvals. The Court also rejected Apotex’s alternative argument that it could have sourced NIAs from two third-party manufacturers. The Court accepted that while the NIAs were theoretically available, Apotex’s evidence was insufficient to establish that Apotex could and would have obtained them. Indeed, the fact that Apotex argued that it would have pursued internal formulation alternatives undercut its alternative position that it would have sought an alternative from a third party.

Finally, the Court also inferred that it was doubtful Apotex would have ever pursued its NIAs, given Apotex’s continued sale of Apo-omeprazole in the real world despite being held liable for infringing a related US patent prior to the relevant time period.

Apotex Not Entitled to s. 8 Damages

When Apotex first sought market entry for Apo-Omeprazole, it succeeded in an NOC case against AstraZeneca, triggering a claim for s. 8 damages. However, AstraZeneca subsequently prevailed in the follow-on infringement action in respect of the 693 Patent, a different patent than was at issue in the NOC case. The 693 patent was extant during Apotex’s alleged s. 8 period of loss.

The issue for the Court was whether Apotex was entitled to s. 8 damages in light of the Court’s finding that it infringed the 693 Patent.

Justice Barnes reasoned that Apotex is not entitled to s. 8 damages, because its claim to s. 8 losses are offset by the costs of the corresponding infringement of the 693 Patent – if Apotex had entered the market during the s. 8 liability period, it would have been required to disgorge any profits to AstraZeneca.

Profits-On-Profits Awarded

The Court awarded additional damages to AstraZeneca to account for the additional profit that Apotex made from the use of its wrongly acquired profits on infringing the LOSEC patent. Given that Apotex co-mingled its sales proceeds from all of its products, it was not possible to trace what exact profits were earned on its sales proceeds from Apo-Omeprazole. As a result, the Court fixed the rate for profits-on-profits at prime compounded annually.

Apotex Disgorges all US Export Profits, less US Judgment

Finally, the parties disputed whether Apotex was required to disgorge its profits made on its infringing export of Apo-Omeprazole for sale in the US.

Prior to the Canadian litigation, Apotex was found to infringe a related patent in the US, for which the US District Court awarded judgment in favor of AstraZeneca. In light of the US judgment, Apotex argued that AstraZeneca was estopped from seeking any further compensation for the US market sales.

The Court disagreed, finding that the causes of action in the Canadian and US proceedings differed, as they arose under separate patents having different expiry dates, involved distinct acts of infringement, and were tried in jurisdictions having different legal principles. Accordingly, the Court ordered Apotex to pay out all of its US export profits, less its portion of the US judgment.

The provisional application of CETA takes effect in Canada today, ushering in a new era for pharmaceutical patent litigation. As part of this implementation, amendments to the Patent Act, the Patent Rules and the PM(NOC) Regulations, as well as the new Certificates of Supplemental Protection (CSP) Regulations, came into force today. See our previous posts on the new PM(NOC) Regulations and CSP Regulations for key details about these new schemes.

Health Canada issued a Guidance Document relating to the CSP Regulations and a Notice in Respect of the PM(NOC) Regulations. … Continue Reading

The provisional application of CETA takes effect in Canada today, ushering in a new era for pharmaceutical patent litigation. As part of this implementation, amendments to the Patent Act, the Patent Rules and the PM(NOC) Regulations, as well as the new Certificates of Supplemental Protection (CSP) Regulations, came into force today. See our previous posts on the new PM(NOC) Regulations and CSP Regulations for key details about these new schemes.

Health Canada issued a Guidance Document relating to the CSP Regulations and a Notice in Respect of the PM(NOC) Regulations. The CSP Guidance Document provides information on the procedure for filing a CSP application, timing requirements, eligibility information, CSP scope, and other details about the new CSP framework. The PM(NOC) Notice outlines updates regarding Health Canada’s administration of the Regulations, including information about how to notify Health Canada of proceedings, new Form Vs, and updated verification requirements.